Moody's lowers India growth to 7% on likely softening of rural demand

Rating agency Moody's expects the Indian economy to grow at a slower pace of 7 per cent in the current fiscal ending 31 March 2016 against its earlier projection of a 7.5 per cent growth rate amidst uncertainty in monsoon rains that could weaken the rural economy.

Moody's Investors Service expects India's weakened rural economy to remain subdued through the fiscal year ending March 2016 (FY2016), particularly if the risk of below-average monsoon rainfall materialises.

"A sustained soft patch for India's rural economy would weigh on private consumption and non-performing assets in the agricultural sector, a credit negative for the sovereign and banks," says Rahul Ghosh, vice president and senior research analyst at Moody's.

Rural income growth in India has been stuck in the mid-to-low single digits in 2015 to date, well off the 20%-plus rates clocked in 2011.

The slower rural income growth is partly the result of increased fiscal restraint by the central government, which Moody's believes is unlikely to change in the coming quarters.

Moody's analysis is contained in its latest edition of Inside India, a quarterly publication that looks at major credit trends in India. The publication also includes key takeaways from a number of audience polls carried out during the first annual Moody's and ICRA India Credit Conference in Mumbai, which took place in May.

According to the poll results, the consensus view on India's economic growth prospects is relatively optimistic, very much in keeping with Moody's baseline scenario of headline economic expansion of 7.5 per cent in FY2016.

Yet, this forecast represents the highest projection amongst G20 economies, and provides a key pillar of support for the Baa3 sovereign rating and positive outlook.

Notwithstanding these growth expectations, Moody's said its polling results pointed to some disappointment amongst the audience with regard to the pace of reform under the Narendra Modi government, and concerns about continued policy stagnation. Almost half of the poll respondents identified sluggish reform momentum as the greatest risk to India's macroeconomic story, Moody's stated.

The rating agency notes that the multi-party, federal democracy in India underpins a gradual pace of policy implementation. While many of the policies are positive for India's institutional strength, the direct impact of growth-enhancing reforms is only likely to take full effect over a multi-year horizon.

For example, plans to cut the country's corporate tax rate to 25 per cent from the existing 30 per cent over the next four years will be credit positive for all Indian corporates insofar as it will reduce their tax expenses and increase their competitiveness over the medium term.

Moody's said economic activity will continue to strengthen on the back of a gradual implementation of reforms that foster domestic and foreign investment.

Consumption growth will continue to be supported by large income gains as inflation has fallen to relatively low levels by the country's past standards and favourable demographics.

"Barring a large shock to commodity prices or food inflation, we think that the central bank's inflation targets are achievable," it added.

"Maintaining inflation at lower levels than in the past will support real incomes and spending. As long as the central bank's objective is credible, it will also foster investment by providing more visibility about future revenue growth and margins," Moody's said.

It added that growth in 2015-16 will also be supported by an accommodative fiscal policy stance and the budget focuses on sustained economic growth as a driver of narrower deficits.